John Murphy, King of Technical Analysis

Top 25. May 19, 2005 1:59 PM

» Kirk - Thu, 19 May 2005 - Go Long!

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He has some really nice charts if you pay for the service (I get it free for posting about it here and using their charts...)

He sends these charts out several times a day. I'm not sure he is accurate at predicting the futue (who is) but his charts and commentary really show what is going on.

-Kirk

SECTOR ROTATIONS INDICATE A COMPRESSED CYCLE -- WHY SECTOR ROTATIONS HAVE TURNED POSITIVE -- MARKET INDEXES NOW JUSTIFY NEW LONGS

SECTOR ROTATION MODEL... The diagram in chart 1 shows the sector rotations that normally occur at different stages of a market (red line) and business cycle (green line). When we talk about a business cycle, we're normally talking about the traditional four-year cycle. That means that these shifts in market leadership often last for several months if not longer. Like market trends, however, not all market cycles are major in nature. Some are more intermediate-term and some are shorter-term cycles. What we've seen since the start of the year may be the shorter-term variety. Although the shifts in market leadership have followed the diagram pretty closely, they've happened in a relatively short period of time. Earlier in the week, I explained which market groups assume market leadership in the late contraction part of a cycle and the early expansion phase. I was describing the order of the rotations, and not necessarily their time duration. Like many of you, I've been surprised by how fast the current down cycle appears to have run its course. Energy leadership is usually associated with a market top. In January of this year, I wrote that money was starting to rotate into defensive sectors like consumer staples and utilities. Further on in a downturn, money normally starts to flow into financials as economic weakness starts to pull interest rates lower. That process may have already started. In the early stages of a market upturn, the two fastest rising groups are consumer cyclicals (like retailers) and technology. That's usually associated with a weaker energy sector. That process appears to have started as well. That's why I've described the sector rotations as having turned positive.

Chart 1

LATEST PERFORMANCE CHART... The performance bars in Chart 2 show the shifts in market leadership that have taken place over the last month (April 16 to May 18). These shifts are exactly the opposite of what we've seen through the first four months of 2005 and are much more positive for the market. All of the groups are plotted above and below the S&P 500 which is the zero line. The bars over the zero line show relative strength (market leadership). Those below the zero line show relative weakness. The three bars to the right show that the weakest market groups are all commodity-related -- gold, oil services, and basic materials. That's a direct result of a stronger dollar and weaker commodity prices. The strongest groups to the left are semiconductors, retailers, and financials. I included the Nasdaq bar to show that it was doing better than the S&P for the first time this year. That's usually a good sign for the market. The Sector Rotation Model in Chart 1 shows that the three groups that do best as the market is turning higher are financials, consumer cyclicals (retailers), and technology. In other words, sector rotations are following the sequence that normally takes place in a bottoming market. That's no guarantee that these sector rotations will stay positive, nor does it tell us how long they'll stay positive. The current sector alignment, however, appears to support the recent upturn that's taken place in the major market averages.

Chart 2

NASDAQ LEADS MARKET HIGHER ... In my view, the most significant improvement has taken place in the technology-dominated Nasdaq market. The Nasdaq Composite Index broke through its 200-day average on Tuesday and has broken its 2005 down trendline. Its relative strength line has turned up relative to the S&P 500. That's usually a positive sign for both. Nasdaq leadership is essential in any market upturn. That's what we're getting right now. One of the missing ingredients in recent market bounces has been higher volume. Yesterday's market upturn, however, saw all the major averages exceed their normal daily volume. That's a sign that institutions are starting to buy back into the market with more enthusiasm. The Nasdaq now appears headed toward its February/March peaks near 2100.

Chart 3

S&P 500 CLEARS 50-DAY AVERAGE ON RISING VOLUME... The next chart shows the S&P 500 closing above its 50-day average yesterday for the first time in two months. And it did so on heavy volume. That's a healthy combination. The S&P is now challenging its early March high near 1191. If it clears that (and I think it will), it could move closer to its 2005 high. Daily MACD lines are also rising, which is positive sign for the short-term trend. The S&P wasn't the only major index to clear its 50-day average. Virtually all of the others did it as well -- including the Dow Industrials and the Russell 2000 Small-Cap Index.

Chart 4

NYSE BOUNCES OFF 200-DAY AVERAGE ... Early last week I described the NYSE Composite Index as being the only one that didn't fall below its 200-day moving average during April. Late last week, however, a sharp drop in the NYSE pushed it into a crucial test of that long-term support line. As its chart shows, however, the NYSE survived that test and more. In today's trading, it moved back over its 50-day line. That has turned the chart from potentially negative (if the 200-day line had been broken), into a much more positive looking one. Chart 6 shows another market index that has taken a dramatic turn for the better. The Dow Jones Composite Index (which includes all 65 Dow stocks) closed under the 200-day line on Friday. Since then, however, it's bounced impressively and is now trading at the highest level in a month. I've found that one of the best times to commit money to a market is when it's bounced off its 200-day line and climbed over its 50-day line. That pretty much describes the present situation.

Chart 5

Chart 6

RECAP OF RECENT ADVICE ... I'm aware that some of our readers are somewhat surprised by what appears to be a relatively quick shift in the market and in my view of it. My shift to a more positive view started a couple of weeks ago. I had been negative on the market since the start of the year. I had expected an eventual drop back to last summer's lows. On May 4, however, when the market indexes started to rebound off their 200-day averages, I suggested reducing bearish positions and a shift back to a more neutral posture. That day's headline read: "Lighten up on Bear Positions" (May 04, 2005). I didn't, however, recommend new long positions in the market indexes. On Monday of this week, I described why an upturn in the Nasdaq was a positive sign for the market and also wrote about some positive sector rotations. Yesterday's climb, however, left little doubt that the market was turning higher. That's why I suggested that new long commitments were justified. And, as is usually the case, I believe those new longs should be concentrated in those groups that are leading the market higher. I'm not completely sure what impact the recent upturn means for the longer-term picture. In times of doubt, however, it's usually best to follow the market signals. At least for now, those market signals have turned positive.

MTA SEMINAR ON FRIDAY... I'll be at the Pennsylvania Hotel in New York tomorrow (Friday) attending the Market Technicians Association annual seminar. I'll be giving a speech on Intermarket Analysis at the Technical Analysis University from 4:00 to 5:00 pm. And I'm part of mid-year market forecast panel at lunchtime. More information on the weekend events can be found under News & Events on the John Murphy page.

-- posted by Kirk

Top 26. May 28, 2005 9:42 AM

» Kirk - No New Highs; Trading Range

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Sat, 28 May 2005 9:25 AM ET

NASDAQ APPROACHES NEXT TARGET AT 2100 -- LIGHT VOLUME IS A CONCERN -- UPTURN IN ENERGY PATCH MAY CAUSE SOME SHORT-TERM PROFIT-TAKING NEXT WEEK

LACK OF VOLUME IS A CONCERN ... The last time I showed the Nasdaq Composite market I wrote that it's next upside target was its spring high at 2100. Friday's close put it very close to that initial upside target. It's daily oscillators also show the Nasdaq to be in a short-term overbought condition. Since the Nasdaq has been leading the rest of the market higher over the last month, any pause in the tech-dominated market should lead to some backing and filling in the market in general. Although Friday's light volume was most likely due to the holiday weekend, the last week's volume has been noticeably light. That may also be a sign that the month long bounce is in need of a rest. One factor that may cause some nervous profit-taking over the next week is the upturn in the price of oil and energy shares. The Energy Select SPDR (XLE) and the Oil Service Holders (OIH) both closed back over their 50-day lines on Friday. That's a positive sign for the energy patch. But any sign of a significant upturn in energy is a potential negative for the rest of the market. My best guess right now is that the market has entered into a trading range between the highs of this year and the recent lows. I doubt that we'll see new 2005 highs. But there's certainly room for the major stock indexes to approach those highs. But probably not before some type of a pullback to work off the short-term overbought condition. As I wrote on Thursday, a key group to watch is the semiconductors especially as the group tests its highs for the year. Whether or not the SOX Index is able to exceed those highs may hold the key to market direction. The Semiconductor Holders (SMH) are close to those highs. A pullback from there would be a logical spot to expect some short-term profit-taking in the technology sector.

HAVE A GREAT WEEKEND ... This weekend marks the unofficial start of summer. Get out there and enjoy it. We'll return to our normal format (with charts) on Tuesday.

Charts by Kirk. Pay StockCharts for a subscription if you want to make and store your own.

XLE found support at the 200 DMA…

-- posted by Kirk

Top 27. Jul 11, 2005 9:16 AM

» Kirk - SEMICONDUCTOR INDEX TESTS 52 WEEK HIGHS -- SEMICONDUCTOR HOLDERS

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SEMICONDUCTOR INDEX TESTS 52 WEEK HIGHS -- SEMICONDUCTOR HOLDERS HAVE ALREADY BROKEN OUT -- ADI AND MU TURN UP

Mon, 11 Jul 2005 11:52 AM ET

SOX IS CHALLENGING PREVIOUS PEAKS ... Last Friday the Nasdaq Composite Index broke through 2100 for the first time this year and started to show better relative strength. Technology leadership is normally good for the rest of the market. That's why today's strong action by the semiconductors may carry a double benefit. Chart 1 shows the Semiconductor (SOX) Index trading at a four-month high and challenging the previous peaks hit in March (449) and last December (454). A close through those two chart barriers (which appears likely) would be a bullish breakout for the chip group. The fact that its relative strength ratio is also on the verge of achieving a new yearly high confirms the new leadership role in the semis and the technology sector. The Semiconductor Holders (SMH) have already broken out to a new 52-week high.

-- posted by Kirk

Top 28. Jul 11, 2005 9:06 PM

» Normxxx - Re: SEMICONDUCTOR INDEX TESTS 52 WEEK HIGHS -- SEMICONDUCTOR HOL

In response to SEMICONDUCTOR INDEX TESTS 52 WEEK HIGHS -- SEMICONDUCTOR HOLDERS posted by Kirk:

The SOX should continue to do well through earnings season-- the SC results have been very good for Q2.

-- posted by Normxxx

Top 29. Jul 13, 2005 12:45 PM

» Kirk - MARKET IS STILL IN A TRADING RANGE

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Wed, 13 Jul 2005 3:9 PM ET

MARKET TESTING TOP OF 2005 TRADING RANGE - ANOTHER LOOK AT ELLIOTT WAVES -- DIVIDEND PAYING ETF HITS NEW HIGH

MARKET IS STILL IN A TRADING RANGE ... In a number of this year's market messages I've described the stock market as being in a trading range. [A "trading range" is a sideways market]. I have allowed for the possibility of "marginal" new highs in the broader market averages. But my longer-range view remains that the market is in the final stage of a cyclical bull market that started in the spring of 2003. That means that the market could retest (or even exceed) its 2005 highs during the summer. But I don't expect much on the upside after that. A headline that I posted on June 16 sums up my views: "Firmer technology sector could extend summer rally - Energy breakouts, however, should cap summer gains". June 16, 2005.

Chart 1

Chart 2

Chart 3

WHICH INDEX TO USE... Part of the problem in giving a clear overview of the market is determining how to measure it. The three market indexes plotted above show very different pictures. The Russell 2000 Small Cap Index has already reached a new high for the year. The S&P 500 Large Cap Index is nearing a test of its 2005 high. The Dow Industrials are closer to their 2005 low. Which one do we use to determine what the "market" is doing? In order to keep things relatively simple, I'm going to use the S&P 500 in this analysis. Not because it's the best of the major averages, but because it's generally viewed as the main market benchmark. Chart 2 shows the S&P 500 moving up toward its March high at 1229. That will represent another test of the top of the 2005 trading range. It may even exceed that chart barrier. But probably not by too much.

ELLIOTT WAVES REVISITED ... Awhile back I published some Elliott Wave analysis to make the point that the S&P appeared to be in the fifth and final upwave in its cyclical bull market. [Elliott Wave holds that bull markets form five waves before ending]. The weekly bars in Chart 4 show why I believe that the fifth upwave started in the middle of last year (point 4). My longer-term view on that hasn't changed since the last time I wrote on the subject. What has changed is my wave count for the period since last summer. As I've explained before, the fifth wave that started last summer should also divide into five waves. Which brings us back to our 2005 trading range.

Chart 4

ELLIOTT RECOUNTS... The daily bars in Chart 5 show my revised interpretation of the Elliott Waves from the bottom last August. The key is to find a clear five-wave advance. Earlier this year I took the view that the early March high was a wave 5 (first 5). I no longer believe that to be the case. The reason has to do with the fact that the March/April decline retraced exactly 50% of its previous advance before turning higher. That's a normal retracement in an ongoing uptrend. The more important point about the April low is that it stopped right at the early October peak (near 1140). In Elliott work, a wave 4 pullback usually stops at the top of wave 1. As a result, I concluded that the April low was more likely a wave 4. That meant another upleg to come. If a fifth wave advance started in April (at point 4), then a retest of the old high is likely. It also leaves open the possibility of a move into new highs. But, as you may know, a fifth wave move into news is usually the end of an upmove -- not the beginning. The revised interpretation is a bit more bullish short-term, but still negative long-term.

Chart 5

THERE ARE ALSO CALENDAR FORCES AT WORK ... My cautiousness on the market after the summer (and into next year) isn't just based on Elliott Waves. It's also based on the normal life-span for cyclical bull markets, which has been exceeded. It's also based on negative seasonal patterns that begin in the autumn. [Remember that most of the summer rally is usually concentrated in July]. On a longer-term basis, the market is in the third year of the four-year presidential cycle. The first two years (2003 and 2004) are usually the best two. The two last years (2005 and 2006) are usually the weakest. Since the next major four-year bottom is due in the autumn of 2006, the time between now and then could be a lot tougher for the market once the summer rally has ended.

DIVIDEND PAYING ETF HITS NEW HIGH... There's at least one way to participate in the market's current strength and still maintain a somewhat defensive posture. That's with large-cap dividend paying stocks. High dividends cushion any potential price drop. Dividend yields are also an attractive alternative to low-yielding Treasury bonds. Chart 6 shows the Dow Jones Select Dividend iShares (DVY) moving to a new 52-week high. Upside volume has been noticeably heavy. The relative strength ratio on top of the chart has been moving up since January and is nearing a new high as well. As far as recent sector rotations are concerned, upside breakouts in retailers and semiconductors (and brokers) could extend the life of the cyclical bull market. But it's unlikely that a major new upleg is beginning as long as energy prices (and stocks) keep rising.

Chart 6

-- posted by Kirk

Top 30. Oct 8, 2005 10:31 AM

» Kirk - 10/8/05: TIME TO BE VERY CAUTIOUS

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Sat, 8 Oct 2005 1:4 PM ET

OCTOBER GETS OFF TO A BAD START -- MARKET INDEXES ARE TESTING 200-DAY AVERAGES -- WEEKLY MACD LINES HAVE TURNED BEARISH

DAILY CHARTS ... October is trying to live up to its reputation as one of the year's most dangerous months. All of the market averages fell sharply and on rising volume. That's a bad combination. Many of them undercut initial chart support at their August lows and are threatening their 200-day moving averages. Chart 1 shows the S&P 500 ending the week below that long-term support line. Most of the other market indexes,however, are still testing the 200-day line. Chart 2 shows the Nasdaq Composite bouncing off it on Friday. Unfortunately, Friday's market bounce came on the lowest volume of the week. That doesn't inspire a lot of confidence. Charts 3 and 4 show two other important indexes that are testing their 200-day lines -- the Russell 2000 Small Cap Index and the Wilshire 5000. Unfortunately, both have fallen beneath their August lows which may act as new resistance barriers on any rally attempt. Another disturbing element of this week's selloff was bigger losses in the Nasdaq market and small caps. Just the week before I had written that new signs of buying in both groups was encouraging. This week's heavier selling in both erased any positive interpretation coming from September's strong finish. Nasdaq and small cap leadership is essential for the market. That's another reason why they have to be watched especially closely as they test their 200-day averages.

Chart 1

Chart 2

Chart 3

Chart 4

WATCHING LONG-TERM INDICATORS ... At the end of the previous week, I wrote that the late-September bounce had kept long-term indicators from turning bearish. That's no longer the case. That's why it's especially important to keep an eye on the weekly and monthly indicators at this crucial point. What happens to them carries a lot more importance than what happens on the daily charts. Chart 5 shows a monthly bar chart of the Wilshire 5000 for the last seven years. [I'm using the Wilshire 5000 Index because it's the broadest market measure that we have]. I've super-imposed monthly Bollinger bands on the price bars. In my view, the most important line is the dashed middle line which is the 20-month moving average. The last two crossings of that line signaled the start of the bear market in 2000 (red circle) and the bull market in 2003 (green circle). A downside violation would carry long-term bearish implications. The 9-month RSI line at the top of the chart shows a "triple top" formation which suggests an overbought market with a major negative divergence (see blue arrows). That's a warning sign. I've shown two different versions of the monthly MACD lines. The one on the top shows the major sell signal in the middle of 2000 and the major buy signal in the spring of 2003 (see arrows). No signal has been given since then. But the two lines are coming dangerously close. The monthly histogram bars at the bottom of the chart show how close

Chart 5

MONTHLY HISTOGRAMS AT DANGEROUS POINT ... The MACD (green) histogram bars measure the difference between the two MACD lines. Major buy and sell signal are given when the histogram crosses above (buy) and below (sell) the zero line. Those signals coincide with the MACD line crossings as shown by the sell signal in the middle of 2000 (red arrow) and the buy signal in the spring of 2003 (green arrow). Notice, however, that the histogram starts moving toward the zero line long before an actual buy or sell is given. That means that the two MACD lines are converging. The rising histogram in the second half of 2002 (green trendline) was an early sign that the bear market was losing momentum. The MACD histogram has been dropping since the start of 2004 (red trendline). That's an early sign that the bull market is losing momentum. To give a major sell signal, the histogram has to fall below zero. It hasn't done that yet. But it's the closest to a major sell signal than it's been in two and half years. The weekly MACD lines have already turned bearish.

WEEKLY MACD LINES TURN BEARISH ... In case you're wondering why I rely so heavily on the MACD lines, it's because I have found it to be one of the most reliable of the all the technical indicators I use. That's especially true of long-term signal on the monthly and weekly charts. The signals are relatively infrequent and, although not infallible, are pretty reliable. Another thing I like about the MACD lines is that they combine two important aspects of trend analysis. The crossing of the two moving average lines gives precise (and generally reliable) trend signals. The MACD lines, however, also have some qualities of an oscillator in the sense that they provide positive and negative divergences. Both of those qualities are demonstrated in Chart 6. I've superimposed the MACD lines on the weekly bars for the Wilshire 5000 Index. The declining trendline shows a huge negative divergence between the MACD lines and the Wilshire at the start and end of 2005. [A negative divergence exists when prices hit new highs but the MACD lines don't]. To the far right, it can be seen that the weekly MACD lines (and the histogram) have turned bearish for second time this year. This is the third MACD sell signal since the start of 2004. I've mentioned before that the second or third signals are usually the most dangerous. The fact that this is the third MACD sell signal carries more weight than the previous two. [Weekly sell signals have also been given on the Dow Industrials, the Nasdaq Composite, and the S&P 500].

Chart 6

TIME TO BE VERY CAUTIOUS... Those of you who have been reading my messages for awhile know my views that the cyclical bull market that started in the spring of 2003 is just about over. I've based that on Elliott Wave analysis, cyclical analysis of the four-year presidential cycle, seasonal trends, analysis of weekly and monthly charts, sector rotations, and intermarket factors like rising inflation and interest rates. I've also written in the past that the most dangerous time for the market is the autumn of 2005 to the autumn of 2006. We're now in that dangerous time period. That's why this week's downturn carries such dangerous implications. I can't say for sure that a major downturn is in the offing. But I can say with some confidence that market risk is at the highest point in nearly three years. That calls for a defensive market posture. A decisive violation of this past week's lows would call for a downright bearish stance.

You have to pay to see his charts.

http://stockcharts.com/

I think he has one of the best charting sites on the net and would probably pay if they didn't give me a free subscription in exchange for posting charts here.

My guess is charts I am looking at and Fundamental things I follow say the market MIGHT have made a cycle bottom last week but it could still try to make another, lower bottom in the weeks ahead, but I think we will have a huge rally out of October, probably led by tech stocks... one of mine is up over 40% already in a very short period...

Only time will tell for sure.

As of 10/8/05 the Total Return for "Kirk's Newsletter Portfolio" since 12/31/98 is Up 169% while the NASDAQ is down 5%!!!
For 2005, Kirk’s Newsletter is Up 3.1% YTD vs QQQQ down 4.0% YTD vs DJIA down 4.6% YTD vs S&P500 down 0.1% YTD

As of 9/30/2005

 
                     YTD  1 Year 3 Yrs    5 Yrs  7 Yrs
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Kirk's Newsletter    5.0%  18.1% 104.9%   32.4%  327.3%
Nasdaq (^IXIC)      (1.1%) 13.4%  83.6%  (41.4%)  27.0%
QQQQ                (1.1%) 13.5%  92.5%  (55.1%)  N/A
S&P500 (^GSPC)       1.4%  10.2%  50.7%  (14.5%)  20.8%
Warren Buffett(BRKA)(6.7%) (5.4%) 11.0%   27.3%   37.6%

BKRa is Legendary Warren Buffett's Berkshire Hathaway
Click for a free issue of my newsletter
Suitable for the aggressive growth part of your diversified investment portfolio or the “Explore” part of your “Core and Explore” strategy.
Portfolio Beta ~1.5 vs 2.0 for QQQQ(5 yr). This means I’ve beaten the pants off the Nasdaq while taking less risk than owning QQQQ!!!

-- posted by Kirk

Top 31. Oct 28, 2005 3:39 PM

» Kirk - 10/28/05 Market Message.

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S&P 500 TESTING TOP OF SHORT-TERM TRADING RANGE -- A MOVING AVERAGE CROSSOVER SYSTEM -- ENERGY AND UTILITY BUYING HELPS STABILIZE MARKET

NO CHANGE IN SHORT-TERM TREND... Last Friday I showed the S&P 500 trading between support at its 400-day (80-week) moving average (blue line) and resistance at the red 200-day (40-week) line. I also suggested that the S&P needed a decisive close above 1200 to turn its short-term higher. A failed attempt at the 200-day line at mid-week kept the S&P in its October trading range. A 19-point rally on Friday, however, pushed it right up against that short-term resistance barrier again. A strong third quarter GDP report helped the market end the week on a strong note. Short-term indicators continue to show improvement. For example, the daily MACD lines have turned positive from the same level as the April bottom. That also suggests an oversold condition. Longer-term indicators have not changed however. The weekly MACD lines are still negative, while the monthly lines are still positive although just barely. Speaking of moving averages, one of our readers suggested that I look at a weekly combination that has a good historic track record. Let's do that.

Chart 1

13 AND 34 EMA LINES ARE STILL UP ... Following last Friday's market message, one of our readers suggested taking a look at the exponentially smoothed 13 and 34 week moving averages on the S&P 500. I had written about this moving average combination in my first book on technical analysis (1987), but haven't been following it too closely since then. Maybe I should have. After looking at the two lines, I have to admit their track record in calling market turns (and avoiding counter-market moves) has been very good. The two moving average lines are applied to the S&P weekly bars in Chart 2. These are exponentially smoothed as opposed to arithmetic averages and are used in combination. Trend signals are only given with the two lines cross. Although the S&P has traded beneath the (red) 34-week EMA twice this year, the (blue) 13-week EMA has stayed over the 34-week line throughout. Therefore, no sell signal has been given.

Chart 2

Chart 3

LONGER-TERM RECORD IS IMPRESSIVE ... In order to see the longer-range moving average crossings more clearly, I've plotted them alone in Chart 3. Only two crossings have taken place in the last seven years. The 13-week EMA crossed below the 34-week EMA in the second half of 2000 to give a sell signal. . An upside crossing in the spring of 2003 gave a buy signal. No sell signal has been given since then. What's impressive about this combination is that the lines didn't cross during intermediate corrections. In other words, they weren't faked out by counter-trend moves. [Only five crossings have taken place in the last ten years]. That's the hallmark of a superior trading system. It gets you in early and doesn't get you out too soon.

Chart 4

CONVERTING BACK TO DAILY EMA LINES... Chart 4 shows what those two weekly lines look like when converted to daily lines. In order for a long-term sell signal to occur, the blue 65 day EMA must cross below the red 170 day EMA. So far that hasn't happened which means that the major uptrend is still intact. I would be remiss if I didn't point out that the 13- and 34- week spans are Fibonacci numbers which have long been favored by professional traders. Last week I plotted an 80-week EMA line on the S&P. Fibonacci followers would have preferred an 89-week EMA. They both work pretty well. The S&P is still above both support lines. It's never too late to learn a new indicator or be reminded of the value of an old one.

BOUNCE IN ENERGY AND UTILITIES HELPS STABILIZE MARKET ... Earlier in the week I showed the energy and utility groups finding new support at their 200-day moving averages. I suggested that both groups had been dropping together and had reached an oversold level where new buying could be expected. I also suggested that buying would help stabilize the market. Not because rising energy prices are good, but because falling energy stocks have hurt the market during October. Chart 5 shows what both groups look like at week's end. Energy's 2.7% gain and the utilities' 2.3% made them Friday's two strongest market groups. New buying in both groups helps the odds for a fourth quarter market bounce.

Chart 5

Chart 6

Here is my (Kirk's) version of John's chart

closeup

Pretty good signal that beats most I've seen. Keys:

Got a very minor whipsaw in 1998, then got out near the top. Like many who got back in early 2003, it missed the bottom, but still did a pretty good job considering it stayed out of the market for nearly all the decline.

Today this 13 week signal is starting to turn up away from the slower 34 week signal...

-- posted by Kirk

Top 32. Nov 29, 2005 12:36 PM

» Kirk - 11/29/05 MARKET LOOKS OVER-EXTENDED

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Good charts for paying customers here while these are my versions where I extended the time frame to show more years.

Tue, 29 Nov 2005 3:20 PM ET

FOURTH QUARTER RALLY MAY BE READY FOR PAUSE AS MARKET LOOKS OVER-EXTENDED

DOW IS OVER-EXTENDED ... Yesterday I wrote about the Dow Industrials running into some selling along its early 2005 peak just below 11,000. I also mentioned it being over-extended. That can be plainly see in the 9-day RSI line which is well into overbought territory over 70. That's true of all the major stock indexes. Last week I explained that the RSI line should be used in conjunction with the ADX line to try to pinpoint short-term tops. I'm going to apply that indicator today to the the Dow. The ADX is the black line shown below the Dow chart. A rising ADX line implies an existing trend. When the green line is over the red line (as it is now), that trend is up. I also pointed out that the market can keep rising as long as the ADX line is rising as well. At least until it enters an overbought condition of its own. There are two criteria for determining that. One is any move over 40 which usually means the current trend is over-extended. The last time that happened was during May. The second criteria is when the ADX line crosses over the upper DI (Directional Index) line as it has done. The third thing needed is an actual downturn in the ADX line. That hasn't occurred yet. But the ingredients are there for a pullback or consolidation in the Dow. As I suggested yesterday, any pullback would be cushioned by support along the 10,700 level.

<img width=520 height=468 src=http://stockcharts.com/def/servlet/Sharp... >
Chart 1

S&P 500 ALSO LOOKS OVER-EXTENDED ... Other short-term indicators paint over-extended pictures for the S&P 500 SPDRS (SPY) and the Nasdaq 100 Shares (QQQQ). Chart 2 shows three versions of Bollinger Bands. The line along the top (%B) plots the bands as an oscillator. A reading over .50 means the trend is up (over the 20-day average). A reading of 1.00 means the price is touching the upper band which is an overbought reading. The %B is now in overbought territory and starting to slip a bit. The line beneath the chart measures band width (the difference between the two bands). A trend is strong when the band width is rising which it's been since early November. A dip in the band width (which is now happening) often signals a short-term top. That could mean nothing more than a short-term consolidation or pullback within the ongoing uptrend. If the latter occurs, support is likely at the 20-day average or along the summer highs near 124.

Chart 2

Chart 3
<img width=520 height=468 src=http://stockcharts.com/def/servlet/Sharp... >

NASDAQ 100 OVERBOUGHT ... Chart 3 shows the Nasdaq 100 Shared (QQQQ) is a similar overbought condition. The line on top is the 12-day Rate of Change (ROC) oscillator which is starting to weaken for the first time since July. That implies that short-term momentum is weakening. The lines along the bottom show the ADX line trading over the green line which is another sign of an over-extended market. If a pullback does occur, the first line of support is the 20-day moving average (green line). None of the short-term indicators shown in the three charts above signals an end to the fourth quarter rally. They simply suggest that the rally is probably in need of a breather.

As of 11/27/05 the Total Return for "Kirk's Newsletter Portfolio" since 12/31/98 is Up 188% while the NASDAQ is up 3%!!! (my portfolio beta is roughly equal to that of QQQQ.

For 2005, Kirk’s Newsletter is Up 11.1% YTD vs QQQQ up 4.9% YTD vs DJIA UP 1.4% YTD vs S&P500 Up 6.2% YTD

-- posted by Kirk

Top 33. Dec 12, 2005 12:40 PM

» Kirk - Mon, 12 Dec 2005: GOLD AND JAPAN HIT NEW HIGHS

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GOLD AND JAPAN HIT NEW HIGHS -- THEY'RE STILL CLOSELY CORRELATED

NEITHER ONE HAS CORRECTED ... A couple of weeks ago I expressed some concern that gold prices might stall or pullback temporarily from long-term supply around $500. Obviously, that didn't happen. Gold has since jumped another $40 to a new 24-year high. It was up over $10 earlier today. Last week I wrote that the red-hot Japanese market has reached overbought territory and might have even started a short-term correction. Last night's 2.17% gain in the Nikkei pushed that market to a new five-year high. In fact, gold and Japan are two of the strongest markets in today's trading. That doesn't necessarily alleviate my concerns that both markets are still looking somewhat over-extended and ripe for some profit-taking or at least some consolidation. But so far my writing about the start of a correction has been premature. As one of our readers reminded me, however, I also wrote several times recently that the gold and Japanese markets have become highly correlated. He pointed out that my call for a correction in Japan while gold was rallying seemed a little inconsistent. Truth is I expected a pullback in both and have gotten neither. The fact that both are hitting new highs today, however, does strengthen my conviction that they are tied together for reasons not entirely clear. The theory I've adopted is that the rising Japanese market is signaling the end of the deflation era that lasted roughly from 1997 to this year which has kept global inflation and interest rates unusually low. That may also be signaling that the next couple of years could see a rising trend both in global inflation and interest rates. I suspect that's what the bull market in gold is telling us. Another explanation is that a lot of the buying of gold is coming from Japan and may be tied to the collapse in the Japanese yen.

Chart 1

GOLD/YEN ACHIEVES MAJOR BULLISH BREAKOUT... Chart 2 shows what a chart of gold looks like to a Japanese trader. It shows bullion quoted in yen. The chart shows bottoming in gold/yen around year 2000 which was when gold bottomed against the dollar. It wasn't until the third quarter of this year, however, when gold/yen achieved a major bullish breakout above its 1996-1997 highs (green arrow). In my view, that probably provoked a lot of Japanese gold buying. For the record, 1997 was the year of the Asian currency crisis when deflationary forces spread from that region around the globe. Japan was a big exporter of deflation. The ability of the gold/yen price to exceed that high is another sign that the deflationary era resulting from "Asian contagion" has ended.

Chart 2

GOLD/YEN IS VERY OVERBOUGHT ... Chart 3 gives a longer term view of the gold/yen chart. Although the trend is clearly up, the monthly RSI line is in the most overbought territory in twenty years. Over the long-run that's a good thing. Over the short-run it may not be. It suggests to me that either gold is overbought or the yen is oversold (or both). As you know, I've been bullish on gold for several years and Japan for several months. I just happen to feel that the current spike in gold prices isn't the optimum time to be jumping aboard. I get nervous when CNBC starts covering the gold surge on a daily basis (even if they keep calling it a bubble). FYI, a bubble is anything the TV analysts didn't see coming or don't understand.

Chart 3

-- posted by Kirk